IFRS Taxonomy, US GAAP Taxonomy, and XBRL

The big push in the XBRL world is to come up with one, unified, taxonomy that can be used globally.  Having a single taxonomy is important since transparency is the most important thing here.  But to fully achieve transparency, the taxonomy has to be able to work with all types of businesses.  As I discussed in my last post, the two leading taxonomies are being created by IFRS and US GAAP.  Let’s explore the two taxonomies a little more.  IFRS and US GAAP have been trying to converge for years…but is it working?  Do we need more than one taxonomy?

The US Securities and Exchange Commission required all public companies to report financial statements using XBRL starting in 2009, making it a “global leader in its use of XBRL to achieve regulatory compliance” (Brands, December 2012).  The requirements were phased in over three years.  In 2011, the final phase of the requirement that affects small-cap and Foreign Private Issuers (FPIs) went into effect (Brands, 2011).  Since most of the world has already accepted the IFRS XBRL taxonomy (xIFRS), the FPI’s have chosen to use it.  The problem is that they are not meeting the requirements of the SEC.  “The first xIFRS taxonomy was issued in late March 2011, barely a quarter before the FPI’s filing requirement date” and “two years after the first US GAAP Financial Reporting Taxonomy (UGT)” (Brands, 2011).  The SEC was concerned that it “didn’t have enough time to review and approve the xIFRS taxonomy, a step required by the mandate” (Brands, 2011).  It was also discovered that the taxonomy was inadequate in the number of concepts and that it didn’t account for “common IFRS financial reporting practice concepts such as sales and aggregated sales and marketing expense” (Brands, 2011).  For 2011, the SEC issued a ‘No Action’ letter since it had not accepted xIFRS.

 
Now, I’m no expert (obviously, that’s why this is called An XBRL Experience)…but the following facts just blew my mind and I’m questioning why the US is trying so hard to converge with IFRS.  “The 2011 UGT includes about 15,000 financial reporting elements with several industry entry points, such as the Commercial and Industrial Taxonomy that applies to most companies.  The 2011 xIFRS taxonomy weighs in at about 2,500 concepts” (Brands, 2011).   You may ask why there is such a great difference in the number of concepts.  Well, the xIFRS initially only addressed IFRS disclosure requirements.  According to Kristine Brands, “common financial reporting concepts and local, jurisdictional, and industry-/company-specific reporting requirements weren’t included” (Brands, 2011).  When the number of concepts is limited like this, to meet disclosure requirements a company must add extensions.  Adding extensions defeats the purpose of XBRL reporting that was supposed to make financial reporting easier to compare.  It is hard to compare components that have been “added” to the reporting by individual companies versus a uniformed concept that could be included in the reporting.  The IFRS has modified their focus to include common financial concepts.

In July 2012, the adoption of IFRS by the U.S. made the news, yet again.  This time it was with regards to the final report by the SEC on the Work Plan to incorporate IRFRS in the US.  “The report suspended the project indefinitely, causing a major setback to the global accounting community’s objective to adopt one single set of high-quality accounting standards” (Brands, September 2012).  Even though the US acceptance of IFRS project is delayed, the International Accounting Standards Board (IASB) is continuing to make progress to improve “the robustness of the IFRS XBRL taxonomy” (Brands, September 2012).  They have added approximately 1,200 tags, taking the total to approximately 3,770 (Brands, September 2012).  One reason that the IFRS is receiving so much resistance by the SEC is because xIFRS “filings are mostly for tax and banking/insurance regulation reporting, not for statutory financial reporting of publicly listed companies as in the SEC’s 2009 XBRL reporting mandate” (Brands, September 2012).

So what is the story on the convergence between IFRSs and US GAAP?  Their history begins in 2002 when the two standards boards began working together to create “a common set of high quality standards” (IFRS Foundation, 2013).  Their goal is to remove the differences between the two sets of standards.  They have achieved many things and are moving forward to reach their ultimate goal.  One way that they are work together is to develop common standards where the FASB (Financial Accounting Standards Board) and the IASB issue standards to their respective standards counterparts (US GAAP and IFRS).  Eventually, “the two sets of standards are expected to both improve in quality and become increasingly similar if not the same” (Financial Accounting Standards Board, 2012).

In July 2012, the SEC released a final report on the IFRSs.  The SEC spent almost two years analyzing the issues of the US incorporating IFRSs into the financial reporting requirements.  In response, the IFRS “issued a statement indicating their commitment to give careful consideration to the report’s observations” (Byatt, 2012).  The response was commented on by Michel Prada, Chairman of the Trustees {of IFRS Foundation} (Byatt, 2012):

"In their February 2010 statement on global accounting standards, the SEC Commissioners’ reaffirmed their strong commitment to a single set of global standards and the recognition that IFRSs were best placed to serve that role for US markets. The statement directed SEC staff to develop and execute a work plan to support this process and the final SEC Staff Report on IFRS was published in July 2012.

The IFRS Foundation staff analysis released today complements the findings of the SEC Staff Report with academic research as well as the experiences of other jurisdictions that have already completed their own transitions to IFRSs. Accordingly, the analysis should also be of use to other jurisdictions that are evaluating whether and how to adopt IFRSs.

While acknowledging the challenges, the analysis conducted by the IFRS Foundation staff shows that there are no insurmountable obstacles for adoption of IFRSs by the United States, and that the US is well placed to achieve a successful transition to IFRSs, thus completing the objective repeatedly confirmed by the G20 leaders."

In the meantime, while we wait to see if the US will adopt the IFRS XBRL taxonomy…the FASB is moving forward with the US GAAP Financial Reporting Taxonomy.  The 2013 version was made available on December 21, 2012 (Eyden, 2012).  The Financial Accounting Foundation (FAF) is responsible for maintenance of the taxonomy.  Working with the FASB, they keep the taxonomy up-to-date with changes in US GAAP…”identifying best practices in taxonomy extensions, and technical enhancements” (Eyden 2012).

Is it possible to have two taxonomies?  While yes, it is physically possible to have two taxonomies…the real question is do we (as a global market) want two taxonomies?  I mean, if the whole goal here is to be able to compare companies ‘apples-to-apples’…then don’t all companies need to be reporting the same stuff in the same manner?  In my opinion, the problem isn’t that a universal language for reporting can’t exist…it’s that the IFRS and US GAAP have too many differences in what the basic standards are which leads to differences in financial reporting which means that setting one standard is difficult.

 

References

Brands, K. (2010, October). The Buzz about XBRL and Interactive Data. Strategic Finance Magazine, 64-65.

Brands, K. (2011, October). A Tale of Two Taxonomies. Strategic Finance Magazine, 56-57.

Brands, K. (2012, September). Update on the IFRS XBRL Taxonomy – 2012. Strategic Finance Magazine, 64-65.

Brands, K. (2012, December). The SEC and Interactive Data. Strategic Finance Magazine, 56-57.

Byatt, M., & Welsh, C. (2012, October 23). Trustees publish IFRS Foundation Staff Analysis of SEC Final Staff Report on IFRS. Retrieved from http://www.ifrs.org/Alerts/PressRelease/Pages/IFRS-Foundation-Staff-Analysis-of-SEC-Final-Staff-Report-on-IFRS.aspx

Eyden, T. (2012, December 24). US GAAP Financial Reporting Taxonomy Now Available. Retrieved from http://www.accountingweb.com/article/us-gaap-financial-reporting-taxonomy-now-available/220562

Financial Accounting Standards Board. (2012, April 5). International Convergence of Accounting Standards - Overview. Retrieved from http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663

IFRS Foundation. (2013, February). Convergence between IFRSs and US GAAP. Retrieved from http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Pages/Convergence-with-US-GAAP.aspx

Kaiser, J. (2012, December 19). A Spotlight on the FASB’s and IASB’s Projects. Setting the standard, DOI: www.pwc.com/us/jointprojects

Pryde, C. (2012, 0419). The Use of Technology to Better Target Benefits and Eliminate Waste, Fraud, and Abuse. Prepared Testimony to the Subcommittee on Human Resources, Washington, D.C.

Ramin, K. & Reiman, C. (2013). IFRS and XBRL: How to improve Business Reporting through Technology and Object Tracking. John Wiley & Sons, Ltd.